JPMorgan Chase & Co, seeking to completely extricate itself from a federal bailout program, has asked the government to auction warrants to buy the bank’s stock, after the Treasury Department demanded too high a price for the bank to buy them back.

This is great news. Treasury should be driving a hard bargain. And JP Morgan should allow private investors to compete to buy the warrants — maybe that will allow JPM to use its capital for better purposes. As an economist, I also welcome the opportunity to find out the market price of the warrants, so we can compare it to what all the modelers have been estimating.

Next question: How do I bid? I hope Treasury does this in a way that lets small investors participate, much as they can in Treasury bond auctions.

Meanwhile, the Congressional Oversight Panel released a report on the warrants. The Panel suggests, albeit with major caveats, that some initial warrant repurchases were done too cheaply:

On Friday, the House of Representatives passed its climate change bill by a slim margin. The bill’s key feature is a cap-and-trade system for greenhouse gases. That system would set national emission limits and would require affected emitters to own permits (called allowances) to cover their emissions.

There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits? Or pay for expanding health coverage? Or maybe, as many economists have suggested, reduce payroll taxes and corporate income taxes to offset the macroeconomic costs of limiting greenhouse gases?

Choosing among those options would be a worthy policy debate. Except for one thing: the House bill would give away most of the allowances for free. And it spends virtually all the revenue that comes from allowance auctions.

As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budgeteer’s perspective, the House bill is a disaster.

The following table illustrates how much revenue the bill would raise and compares it to the alternative of auctioning all the allowances:

Summary: Readers had some excellent comments on last week’s post about auctioning the TARP warrants. Here are some updated thoughts.

Last week I argued that the Treasury should auction off the warrants it received when it made TARP investments in banks. Specifically, when banks are ready to repay the TARP investment, Treasury should auction the associated warrants to the highest bidder, which might turn out to be a private investor or the bank itself. Among other things, I argued that this approach would enhance the transparency of the process, ensure that taxpayers get a fair return on their investment, and allow banks to preserve needed capital. A potential win all-around.

In response, readers sent me several very helpful comments that deserve highlighting.

In principle, auctions are a powerful tool for allocating public assets in an efficient and transparent manner. The FCC has had great success auctioning off portions of the radio spectrum, for example, and the Treasury uses auctions every week to sell the debt necessary to finance our government. But other uses of auctions — e.g., to allocate landing slots at congested airports or to distribute allowances under a climate cap-and-trade program — face strong opposition from some businesses and some politicians. (ht: Marginal Revolution)

People usually think of eBay as the master auctioneer of the Internet age. As this month’s Wired points out, however, Google is the real master.

Google famously uses auctions to decide which ads appear in which positions when you do a search. But Google takes auctions much further:

Google even uses auctions for internal operations, like allocating servers among its various business units. Since moving a product’s storage and computation to a new data center is disruptive, engineers often put it off. “I suggested we run an auction similar to what the airlines do when they oversell a flight. They keep offering bigger vouchers until enough customers give up their seats,” [Google Chief Economist Hal] Varian says. “In our case, we offer more machines in exchange for moving to new servers. One group might do it for 50 new ones, another for 100, and another won’t move unless we give them 300. So we give them to the lowest bidder—they get their extra capacity, and we get computation shifted to the new data center.”

Summary: Treasury should give up on negotiated sales and simply auction the bank warrants it received through its TARP investments. Auctioning the warrants will enhance the transparency of the process, ensure that taxpayers get a fair return on their investment, free banks from the nuisance of government involvement, and allow banks, if they choose, to preserve needed capital.

Healthy banks are anxious to escape from the government’s Troubled Asset Relief Program. TARP capital seemed cheap at first since the government offered more generous financial terms than were available from private investors. But now the hidden costs of government investments – compensation limits, tighter regulatory scrutiny, and a public backlash against financial bailouts – have become apparent. As a result, many banks want to pay off Uncle Sam and free themselves from the TARP.

Repayment sounds simple. Subject to regulatory approval, banks can simply write a check to Treasury that covers the amount of money they received (by selling preferred stock) plus any outstanding dividends. But there’s a complication. When Treasury purchased the preferred shares, it also received warrants to purchase common stock in the future. To fully escape the burden and stigma of TARP, the banks thus need a way to get Treasury to relinquish those warrants.